Suvashree Choudhury and Swati Bhat

RBI Hikes Key Rate, Keeps Stance ‘Neutral’

The RBI’s monetary policy committee lifted the repo rate by 25 basis points to 6.25%. This is the first change since a 25 bps cut in August 2017.

Mumbai: The Reserve Bank of India (RBI) on Wednesday raised its policy rate for the first time in over four years, due to inflation concerns, and it surprised some analysts by keeping its policy stance as “neutral”.

The RBI’s monetary policy committee lifted the repo rate by 25 basis points to 6.25%. This is the first change since a 25 bps cut in August 2017.

The hike, the first since January 2014, was predicted by 46% of respondents in a Reuters poll this week.

The reverse repo rate was increased by 25 basis points to 6.00%.

All six members on the policy panel voted for a rate hike.

Capital Economics said it believes Wednesday’s decision “marks the start of a modest tightening cycle over the coming months”.

In a statement, the RBI said it “reiterates its commitment to achieving the medium-term target for headline inflation of 4 percent on a durable basis”.

Due to inflation concerns, some analysts had expected the RBI to switch its stance to “tighten” on Wednesday.

Inflation worries have risen following a steep increase in global oil prices and a weakening rupee, plus a potential rise in consumer spending as India’s economy expanded at a robust 7.7% annual pace in January-March quarter.

The RBI on Wednesday also raised its inflation projection for the second-half of fiscal 2018-19 to 4.7% from an earlier projection of 4.4%.

Annual consumer inflation was 4.58% in April, the sixth straight month it topped the RBI’s medium-term 4% target.

The 10-year benchmark bond yield rose 4 basis points to 7.87% after the monetary policy announcement while the rupee was at 66.97 to the dollar from 67.05 before the news.

The main stock market index pared gains after the central bank’s announcement.

India’s central bank becomes the latest in Asia to increase rates recently, to battle inflationary pressures or support its currency.

In May, the Philippines and Indonesia lifted their benchmark rates for the first time since 2014. In March, China raised a key short-term rate following a Federal Reserve’s rate hike.

India’s rate decision comes one week before a Fed policy meeting that’s widely expected to raise US interest rates.

(Reuters)

RBI Keeps Rate on Hold, Stance ‘Neutral’

Five of six members on the monetary policy committee voted for a hold, while one wanted a hike in the repo rate.

Mumbai: The Reserve Bank of India kept its policy rates on hold for the fourth straight meeting on Thursday and retained its “neutral” stance even as inflationary pressures have eased more than expected.

The RBI kept its policy repo rate unchanged at 6%, its lowest since November 2010, as unanimously expected by 61 respondents in a Reuters poll.

The reverse repo rate also remained unchanged at 5.75%.

Five of six members on the monetary policy committee voted for a hold, while one wanted a hike in the repo rate.

Inflation concerns have eased substantially following a crash in vegetable prices which is expected to keep price pressures soft for the next few months.

However, oil prices remain a risk, with India importing about 80% of its crude requirement.

Bonds rose after the RBI’s statement, while the rupee firmed and stocks extended early gains.

The ten-year benchmark bond yield fell to 7.19% from 7.28% before the announcement, while the rupee was trading at 64.95 to the dollar from 65.04 before. The main market index was up 1.8%.

Inflation easing, growth

The RBI projected economic growth of 7.4% for the current fiscal year that began on April 1.

It also lowered its April-September inflation projection to 4.7-5.1% from February’s 5.1-5.6%.

After hitting a 17-month high in December, retail inflation eased for the second straight month in February and by more than expected, to a four-month low of 4.44%. But it was still higher than the central bank’s medium term target of 4%.

That has prompted most market watchers to push back their forecasts for a rate hike to early 2019, from earlier estimates of the second half of this year.

While inflation fears have eased in the short-term, the RBI sounded cautious and opted to wait for more data instead of giving a clear indication of its policy path.

“The MPC reiterates its commitment to achieving the medium-term target for headline inflation of 4 percent on a durable basis,” the RBI said in a statement.

The RBI is also mindful of the pace of India’s economic recovery, after a loan-fraud scandal worth over $2 billion at the country’s second largest state lender Punjab National Bank.

Greater regulatory scrutiny in the wake of the scandal could make banks more wary of lending, slowing down business activity after India’s economy grew 7.2% in the October-December, its fastest in five quarters.

(Reuters)

RBI Holds Rates, Eyes Inflation and Rebounding Growth

The decision to stand pat was widely expected after the annual rate of consumer inflation increased in October to 3.58%, driven by higher food and crude oil prices.

A woman walks past the Reserve Bank of India (RBI) head office in Mumbai, December 6, 2017. Credit: Reuters/Shailesh Andrade

Mumbai: The Reserve Bank of India (RBI) kept its policy rate steady on Wednesday, as widely expected, after inflation accelerated to a seven-month high and stronger economic growth reduced the need for monetary stimulus.

All but two of 54 analysts in a Reuters poll had predicted the repo rate would be left unchanged for a second straight meeting at 6%, its lowest since November 2010.

The RBI also kept the reverse repo rate unchanged at 5.75%.

The decision to stand pat was widely expected after the annual rate of consumer inflation increased in October to 3.58%, driven by higher food and crude oil prices. That’s still low by Indian standards, but not far from the central bank’s 4% target.

Nonetheless, the RBI left its policy stance “neutral” while slightly softening its language on inflation by saying risks were “evenly balanced”.

Many analysts believe the RBI will keep rates on hold in coming months, including at its next policy meeting in February, as it watches inflation trends.

“The global policy rate cycle and (rising) commodity prices, along with the consolidated fiscal position, will keep the RBI cautious,” said Suvodeep Rakshit, a senior economist with Kotak Institutional Equities in Mumbai.

Government officials have been calling on the RBI to cut rates given the economy, though recovering from July’s bumpy launch of a national sales tax, is not yet growing fast enough to create the jobs needed for India’s young workforce.

“We have a neutral stance, which means that depending on the data flow in coming months and quarters we’ll determine what we do regarding the policy,” RBI governor Urjit Patel told a news briefing after the decision.

“All possibilities are on the table, and we would look carefully at both the inflation data and growth data that comes in coming months.”

The Reserve Bank of India (RBI) Governor Urjit Patel attends a news conference after the bi-monthly monetary policy review in Mumbai, December 6, 2017. Credit: Reuters/Shailesh Andrade

Five members of the Monetary Policy Committee (MPC) voted to keep rates unchanged, while one voted for a 25 basis point (bp) cut.

Indian bond prices have slumped in recent weeks as investors sharply pared expectations for rate cuts.

The central bank took advantage of an extraordinary period of low inflation, including a slump in food and energy prices, to cut rates by a total of 200 bps from January 2015 until August this year, when it last cut the repo by 25 bps.

But those factors are now reversing, with crude prices rallying and food prices expected to climb further.

Moreover, a growing number of global central banks, including most recently South Korea’s, are tightening policy, with the US Federal Reserve expected to hike rates again next week.

There is also growing uncertainty on whether the government will have to borrow more as it struggles to meet its fiscal deficit target, which could add to price pressures.

On Wednesday, the RBI slightly raised its inflation projection by 10 bps to between 4.3% and 4.7% in the six months ending in March 2018.

It also retained its projection for gross value added growth, a measure of economic expansion it prefers, at 6.7% for the year ending in March, the same as its forecast in October.

India’s economic growth rebounded to 6.3% in the three months ending in September, halting a five-quarter slide.

Bond markets took solace that the statement was not as hawkish as some had feared after the recent spike in inflation.

The yield on the benchmark 10-year bond yield slid 3 bps to 7.04% from around 7.07% before the policy decision. It had risen more than 60 bps since the RBI’s August 2 policy meeting.

But the rupee weakened to 64.49 per dollar from around 64.47 before the RBI’s statement, while the broader NSE share index fell 0.7% for the day, mostly before the rate announcement.

(Reuters)